Portugal has severely struggling economically since 2010 when Moody's Investor Service cut their bond rating. In combination with the effects of the 2008 global financial crisis this led to less bonds being sold by the government and therefore a lack of financing. In 2011 Portugal's finances were in such disarray that they received a 78 billion Euro bailout from the International Monetary Fund European Central Bank, and World Bank. Now in 2013 they are again at risk for another default due to domestic disputes on governmental budget cuts.
According to CS Monitor On April 5th the Portuguese Constitutional Court rejected austerity measures that would focus on cutting public employee salaries and benefits to ensure Portugal meets the IMF, WB, and ECB sanctions and can continue to have their support. If the Portuguese can not agree on a budet they risk missing sanctioned targets and losing support of the lenders whose bailout payments they depend on. To meet the targets cuts will need to be made in areas such as education, healthcare, social security, and state companies. For two years Portugal has been meeting the sanctions imposed by the banks and according to the Wall Street Journal their economy has contracted 5% while unemployment has reached 17%.
These struggles exemplify that EU members must give up monetary policy autonomy to enjoy the benefits of EU membership. This is a huge sacrifice for domestic politics because it creates unrest and is difficult for economic stability to develop. With the ability to determine their own monetary policy Portugal would be able to at least manage their unemployment to try and promote stability. According to the BBC these measures have "fiscally crucified the population" but the implications of another default by Portugal for the EU could mean even worse. The risk of another default and the financial pains Portugal has suffered could raise questions about the effectiveness of sanctions given by the IMF, ECB, and WB as well as the viability of the EU system. While it seems Portugal will meet the targets set forth by the banks and not default, it does not seem that real economic recovery is occurring. Though recovery has not been immediate many economic policies take time to play out and hopefully Portugal will turn around and help stabilize a economically turbulent eurozone.
While the majority of those affected by the crisis have accepted that budget cuts and other austerity measures could eventually solve the problem, some are less patient. Trevor mentions how recovery has not been immediate, but expecting tighter fiscal discipline to act as a quick fix is improbable. This makes the situation particularly difficult for heads of state trying to balance between institutions like the IMF and the citizens to whom they are accountable. I think the BBC article cited above directly paralleled the case with Greece--government officials are trying to resolve the economic crisis through budget cuts but still need to work with the preferences of the citizens. It will be interesting to see how this plays out, as PM Coelho decides where to make the necessary cuts.
ReplyDeleteAccording to The Guardian, "Portugal's bailout programme was thrown into renewed uncertainty on Friday night, when its constitutional court dramatically blocked parts of its austerity budget." As Trevor mentioned above judges ruled that planned cuts in public sector pay and state pensions were unconstitutional because they failed to share the burden fairly. According to The Guardian, "this created a black hole in the country's fiscal plans, which Passos Coelho is now racing to fill." With large budget cuts already in education and health care it will be interesting to see what will be next.
ReplyDeleteWhile Portugal and Greece face similar austerity measures, I think it is important to note that Portuguese dedication to reducing debt service has been, and continues to be, much more pronounced than in Greece. Portugal's previous two years of above-satisfactorily meeting conditional loan requirements should indicate to investors that Portugal is reversing its situation.
ReplyDeleteThis is a good example of conditional loans affecting the sovereignty of a country's policy making. The government of Portugal is torn between being accountable to its lenders and being accountable to its general population. The ruling by the constitutional court seems to indicate that Portugal is trying to comply while trying to keep citizens content. Interesting because it ties into the foreign aid discussion that we have been having in class over the last week.
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